Equity markets correct more than 8% from record high. Is it a breather or bear run?

Manish Jain, Fund Manager, Ambit Asset Management

The Indian equity markets have corrected over 8 percent in the last month or so, ending a long bull run, which has lasted more than a year and half. The key question that comes to everyone’s mind is: a) how much more of a correction remains, and b) what should be the investment strategy at this point in time.

To answer the first question – despite the recent correction, Nifty is up around 22 percent on a YTD basis and 28 percent in the last one year. The markets have more than doubled since the lows of March 2020. So, in perspective, the recent correction is not that massive. The jury still remains on how prolonged the pain may be. At a global level, there are three key risk factors:

a) Inflation – Globally inflation has proven to be far more sticky than previously envisaged. US, European Union, China are all reeling under the effect of multi-year high inflation. The Interest rate cycle is undoubtedly changing at a rapid pace. Hence, rate hikes by the US Federal Reserve, in our view, remains one of the key global risks for equity markets.

b) China slowing down – The Chinese economy is going through a reset and is poised to clock in growth levels of less than 5 percent for the foreseeable future. This on a standalone basis is great news for economies like India, not just from an FII inflow perspective but also to play the China plus one theory. However, when you combine the slowing economy with rising inflation, the real danger for the global markets is China entering a stagflation situation. This remains the second biggest risk for the Indian markets at the moment.

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Manish Jain

Fund Manager - Coffee Can PMS|Ambit Asset Management

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c) FII/FPI selling - India has been one of the best performing markets globally in the last year or so. Nikkei, Shanghai and KOSPI have all yielded single digit returns in the last one year. Even Dow Jones has underperformed India by a wide margin. Thus, as we enter the year-end, naturally one place where FIIs are booking profits, is India. This is something that is more transitory in nature and will likely persist for a few weeks before things start settling down.

So, to answer the long question in short, we expect markets to remain sideways for the next few weeks before they start settling down. While our domestic economy remains on a strong footing and is well poised for structural growth there may be some short hiccups driven by global factors. However, we do not foresee a massive and structural correction anytime soon.

Now to answer the more important question – we believe that equity investors would do well to adapt the Buy-Hold-Buy strategy. Invest in quality stocks (in terms of Corporate Governance and earnings) and hold on to them for the long term, do not panic on dips but keep accumulating. Over the course of the next three years, there is still a lot of money to be made in Indian Equity markets.

Do not be fearful, keep accumulating the Good & Clean companies and create wealth for yourself in the next three to five years.

Happy Investing!

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